Appeals Court Favors Bells On Rates For Access

By STEPHEN LABATON

Published: March 3, 2004

WASHINGTON, March 2—
A federal appeals court handed a big victory to the four large regional Bell telephone companies on Tuesday, striking down regulations that had required the Bells to lease their local networks to rival companies at low prices set by state regulators.

If Tuesday's decision survives further legal challenges, it would be a substantial blow to AT&T, WorldCom and smaller companies that have relied on inexpensive access to the local networks to reach their customers. By increasing the cost of access, the ruling could significantly reduce competition in local markets and lead to higher prices for callers, according to competitors of the Bell companies, consumer groups and some analysts.

A three-judge panel of the United States Court of Appeals for the District of Columbia sharply narrowed the role of state regulators in overseeing competition in the phone market. It criticized the Federal Communications Commission both for its delegation of authority to the states and for issuing other regulations last year that a majority of the commissioners had said were intended to make local phone markets more competitive.

After the decision, separate statements issued by the F.C.C. chairman and another commissioner, who had opposed the rules, and by the three commissioners who approved them, suggested that the agency was in a kind of civil war over the regulations.

The three commissioners who approved the rules said they had instructed ''our general counsel'' to seek an appeal to the Supreme Court. But the chairman, Michael K. Powell, who dissented from the rules, said he had instructed the staff to begin drafting regulations to comply with the appeals panel's order. A fifth commissioner who had dissented with Mr. Powell applauded the decision and urged the F.C.C. to rewrite the rules.

As a matter of protocol, the agency will consult with the Justice Department, which argued in favor of the new rules before the court, before deciding whether to pursue an appeal.

Rivals of the Bells criticized the decision. ''At a time when consumers and small-business owners are just beginning to realize the benefits of competition, the D.C. Circuit today held up a stop sign and halted eight years of progress,'' said James Cicconi, AT&T's general counsel. ''This decision is not in the public interest, but is instead in the interest of four Bell monopolies.''

But executives of the regional Bell companies contended that the rules never made economic sense and in reality discouraged greater investment in local phone networks. The rules, they argued, had forced the Bells to set artificially low leasing rates to rivals.

William M. Daley, president of SBC Communications, said: ''Today's court action is a victory for consumers, and should help this industry move forward in developing healthy, sustainable and economically rational competition that will extend telecommunications innovations further and faster in the marketplace. This appears to be a victory for those who support markets free of rules that have repeatedly been judged illegal and which have eliminated jobs, shrunk investment and hurt fair competition.''

The news of the decision, which came about two hours before the market closed, lifted the share prices of the regional Bells -- SBC, Verizon, BellSouth and Qwest.

The 62-page opinion in the case, United States Telecom Association v. Federal Communications Commission, was written by Judge Stephen F. Williams and joined by Judges Harry T. Edwards and A. Raymond Randolph.

The judges were harshly critical of the commission, saying it ignored the court's previous decisions on phone regulation and the mandate of the Telecommunications Act of 1996.

The court's frustration with the F.C.C. and its ''unbundled network elements rules'' was reflected in the decision's last paragraph, which ordered the commission to rewrite the rules in the next 60 days or after denial of a petition for a rehearing, whichever is later -- either before the three-judge panel or the full circuit. ''This deadline,'' it said, ''is appropriate in light of the commission's failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings.''

But the issues raised by the case may take many months to resolve, particularly if the Supreme Court decides to review it in its next term, beginning in October. And it is not known if the current commission will act soon or whether the issues will be put off until next year, when the agency's composition might change after the presidential election.

For the time being, at least, the decision was vindication for Mr. Powell, who lost control of the commission and predicted in February 2003 that the new rules could not withstand judicial challenge. He found himself in the uncomfortable position of being the first chairman in more than a decade to dissent from a major telecommunications decision.

On Tuesday, the court upheld rules, supported by Mr. Powell and two other commissioners, that had relieved the Bell companies of their obligation to give rivals low-cost access to many of the crucial elements of their new high-speed online networks.

Mr. Powell issued a statement after the decision that all but said: I told you so. ''I dissented from the majority's decision on local telephone competition,'' he said, ''because it was inconsistent with the law and would result in years of regulatory uncertainty and unrealized consumer promise. Today, the court agreed and restored the opportunity to bring about new advanced services and true competition that will bring consumers choice and innovation.''

''My fellow commissioners and I need to expeditiously get to work to produce a set of judicially sound rules, once and for all,'' Mr. Powell said. ''I have already directed the staff to begin preparing new rules that will provide the sorely needed clarity and guidance essential to bringing consumers the benefits they were promised and deserve.''

Yet there was no indication that Mr. Powell had any more control over the agency now than he did when it approved the rules last year.

The three commissioners who voted in favor of them -- Jonathan S. Adelstein, Michael J. Copps and Kevin J. Martin -- suggested in a brief statement that the appellate panel's opinion was inconsistent with earlier decisions by the Supreme Court.

''We believe that the rules preserve competition in a manner that is lawful, and recognize the important role that states have historically played,'' they said. ''Today, over 50 million Americans benefit from the new local and long distance one-rate plans offered by both incumbents and competitors that are a result of our rules.'' The three commissioners also said they had instructed the general counsel ''to seek a stay and to appeal the D.C. Circuit decision to the Supreme Court so that we can clarify tension with the Supreme Court's past decisions.''